Japan Conducts 'Rate Check' Ahead of Holiday... Yen Sharply Rebounds to 156 per Dollar

Market Caught Off Guard: "Faster Than Expected"
Yen Weakness Persists Despite BOJ Rate Hike
Heightened Vigilance Over Possible Intervention

The Japanese government and the Bank of Japan (BOJ) have reportedly begun conducting a "rate check" ahead of a five-day holiday that will last until September 23. This move comes as the yen remains weak despite an increase in the benchmark interest rate, applying pressure to the market. The yen rebounded sharply from the 158-yen level per US dollar to the upper 156-yen level.

Reuters Yonhap News

According to the Nihon Keizai Shimbun (Nikkei) on September 19, the BOJ conducted the rate check on the morning of September 18 (Eastern US time). A rate check is a process in which the central bank checks the exchange rate levels with market participants, and is interpreted as an official “warning signal” the authorities send just before intervening in the foreign exchange market.

Market participants say Japanese authorities moved faster than expected. A representative of a London-based hedge fund said, “We had set 160 yen to the dollar as a major threshold, so the authorities’ action caught us off guard,” adding, “It was also quite effective.” A representative of a Japanese bank in the US stated, “This was a signal that they will not tolerate a sharp yen depreciation ahead of the holiday.”

Indeed, the yen weakened to the 158-yen level per dollar on September 18, but following the rate check, yen-buying and dollar-selling orders poured in, and it traded in the upper 156-yen range per dollar.

This rate check came even as the yen remained weak after the BOJ raised its benchmark interest rate. The BOJ decided to raise rates by 0.25 percentage points on September 18, but the yen continued to be sold.

Nikkei analyzed that factors such as the expectation of a BOJ rate hike already being priced in at over 90%, as well as the fact that the so-called “reflationist” policy board members—who advocate for monetary easing and aggressive fiscal policy—opposed the rate hike, all played a role. This suggests that the market perceived the decision as a “dovish” hike.

A rise in US interest rates also contributed to the yen’s weakness. In the US bond market on September 18, long-term yields temporarily rose by 0.07 percentage points to above 5% compared to the previous day. The US Dollar Index, which measures the strength of the greenback, recently climbed back above 100, signaling renewed gains.

Market watchers have cautioned that there is a risk the authorities could actually intervene in the foreign exchange market during this holiday period. The Japanese government and the BOJ have intervened in the market twice so far this year with yen-buying and dollar-selling operations. Between late April and early May during Golden Week, about 11 trillion yen were deployed, and in July and August, a record 15 trillion yen—coordinated with the US—was injected into the market.

Especially during the holiday period, trading activity from Japanese investors decreases, causing a reduction in foreign exchange market liquidity, which can lead to greater exchange rate volatility. A representative from a macro hedge fund in the UK remarked, “We need to prepare for the possibility of actual intervention during Japan’s holiday period.”

This content was produced with the assistance of AI translation services.